How Much Mortgage Can I Afford?

Many people equate the purchase of a house with finally finding success. There are new buyers entering the market every day, looking for their dream property. The market is still favorable for them at this time; mortgage rates are down and homes are listed at good prices, which means that new buyers find themselves in a good position.

Approximately 33 percent of home sales are completed by new buyers, people who have never owned a home in the past. These individuals are at an advantage right from the beginning; with a little research, they can pull up facts and figures about the home that they are interested in. That is why 90 percent of buyers go on the Internet to research properties during the time that they are looking for a house.

While going on the Internet certainly helps the home buying process, it doesn't give you all the information that you need. In particular, many new buyers are at a lost as to "how much house" they can fit into their budget.

However, even that statement is a little misleading. Instead, the buyer should ask themselves what they can pay and what they want to pay. There are a few ways to figure out the answer to that complicated question.

By looking at a few different factors, buyers can feel secure and happy about their purchase. In addition, they will not have to worry that they will struggle to make their payments.

Look At Several Models Of Home Affordability

There is no one method that will help you figure out what you should spend on your house. Instead, you need to examine the issue from several angles to determine what homes fit into your budget.

For example, the lender may tell you that you can spend up to $300,000 on a house. However, a $300,000 home would give you a mortgage that is well in excess of what you are paying for rent. As a result, you may determine that you only want to spend up to $200,000, even though you could technically spend more because you just aren't comfortable with such a high mortgage.

There are a few ways that new buyers work through how much they should spend on a house.

Think About What Your Lender Says

You can quickly figure out how much house you can purchase by getting the information from your lender. The loan officer will look at your credit, how much debt you have, how much money you make and how much money you have for a down payment. He or she when then determine the maximum amount you can spend on a house.

This is nice information to have, but many new buyers do not want to spend as much as they can. For example, the lender may say that you can have payments each month that takes up 40 percent of your gross income. These payments would be for your mortgage, any loans you have, or any other debt you carry.

Therefore, if you make $4000 a month, the lender might say that you could pay $1600 a month in payments. However, after taxes and fees, you don't make $4000 per month. You might also want to save and put money away for retirement.

If you spend the maximum of $1600 per month in payments, you may not have as much as you would like for other living expenses. It all depends on your needs and wants.

Therefore, the number that your lender gives you does not factor in the way that you like to live or what you want for your future. Therefore, think about that number, but take it a step further by determining how much you personally are willing to spend.

Figure Out What Makes You Comfortable

Home ownership does not need to keep you awake at night, filled with anxiety. If you go about the process correctly, your mortgage payment will cause you no more undue stress than your rent does.

First, you need to figure out how much you would like for your mortgage to be. Begin by thinking about how much you pay in rent. Obviously, that amount will be applied to your mortgage instead, so you have a figure to start with.

From there, think about your monthly budget. Are there things that you are spending money on that could be cut out? Track your spending for a period of time to see.

Anything that you don't need to spend money on, you should not spend money on. Take that amount and add it to the number for your rent. When you are done, you will have an amount that you feel good about paying each month.

After that, speak to a mortgage lender. Tell the loan officer what your maximum payment is. He or she will then look at private mortgage insurance, homeowner's insurance, and taxes. They will figure out how much will be applied to your interest and how much will be applied to your principal.

Live The Way you Want

Ideally, you want to purchase a home and keep your lifestyle the way that it is. More and more buyers are opting for this when they purchase a home. In 2015, NAR released a survey that polled people with student debt that also bought a house. Despite the fact that these buyers now had a mortgage to contend with, only 50 percent cut back on entertainment and other non-essentials.

Depending on where you live, you may be able to buy a house and secure a mortgage payment for the same amount that you pay in rent. If you are one of the lucky ones, your lifestyle will not need to change.

However, in general, it is a good idea to set a monthly budget and cut back on your spending before you buy a home. That does not mean, however, that you need to give up on everything that you want; you should still be able to indulge every once in a while.

What Happens If You Think You Can Spend More Than The Lender Does?

The lender has the ultimate authority when it comes to how much mortgage you qualify for. This is true even if you feel that you can pay more than the lender thinks you can.

While that may be frustrating at first, it is important to remember that lending limits were established as the result of a lot of data. If their number is smaller than yours, you will likely be in better shape if you spend what the lender thinks you can afford.

Mortgage rates are very affordable right now, so it is a good idea to start looking at homes if you are interested in buying. Find out how much you are approved for, and then go from there.

Ari Socolow: Ari Socolow is the Chief Economist and Editor-in-Chief at BestCashCow. He is particularly interested in issues relating to financial literacy and bank transparency. Since co-founding this website in 2005, Ari has been frequently cited in the media as an expert on local and national savings accounts, CD products, mortgage and loan products and credit card rewards products.
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